LPs are rethinking their private credit portfolios as geopolitical headwinds and wobbles in US private credit raise new questions about concentration risk in more mature, or ‘developed’ markets. As a result, investors are giving emerging markets a closer look.
“Investors love stability, and private credit practically thrives off it,” said one large pan-European LP. But trade tariff volatility, the Iran conflict, AI disruption, and fears of private credit fraud mean that investing in the US or in Europe “no longer becomes synonymous with lower risk,” the LP added.
Alper Kilic, head of alternative credit at Ninety One, sees stress in developed market private credit as an “inflection point” for LPs to diversify their portfolios with more under-represented geographies. “We see it every single day when we sit in front of our clients. We get calls from insurance companies, pension funds, government funds saying [they’ve] been in the US and Europe for too long and now [they’re] over-concentrated,” Kilic said.
Over 80% of the 250 investors surveyed by Gemcorp for its 2026 private credit study were concerned about the deterioration of developed market private credit, naming rising default rates, high leverage, portfolio concentration, weakening credit documentation and growing PIK usage as the main issues they needed to address in their portfolios.
Emerging market private credit pulled in a record $22bn in FY 25, up 40% from its previous record in 2022, according to Q1 26 data from the Global Private Capital Association (GPCA). Zoom out a bit further, and EM private credit assets under management have grown 500% in the last decade, according to an EU market stability report from May.
However, more interest and optimism in emerging markets doesn’t mean investors are running to get their chequebooks out quite yet. Concerns about regional stability, manager selection, deal sourcing, and credit structuring are high hurdles that both LPs and GPs looking to opportunities in the region will have to overcome.
Uncharted territory
The global private credit market has more than quadrupled from $380bn in 2010 to an estimated $3.5trn in 2024, but EM private credit accounts for only 4% of total AUM despite a severe financing gap in developing economies. A new report from the United Nations Conference on Trade and Development (UNCTAD) states that despite financing from government aid programs and DFIs, emerging markets still require $4.3trn in financing a year for critical infrastructure such as schools, roads and clean energy.
Add in shallow local capital markets or legacy bank retrenchment, and there’s plenty of uncharted territory for a private credit land grab, according to GPCA’s private credit outlook.
The return premiums over DM private credit are also nothing to scoff at. Though loan terms and margins can differ from region to region, EM private credit can result in a 150-200bps premium over a comparable deal or transaction in developed markets, said Kilic. Investors can also count on unlevered double-digit returns, ranging from 11-15% annualised, depending on the lender.
“In these markets, you’re getting paid a very significant premium to do private credit while not necessarily taking more risk. But you have a lot less competition and that’s what’s driving returns,” Michel Lowy, co-founder of SC Lowy, a direct lender focused on the GCC and APAC.
LPs aren’t the only ones who’ve noticed there might be a proverbial gold rush in EM. Megafunds want in too.
In H1 26, KKR raised $2.5bn for KKR Asia Credit Opportunities Fund II, the region’s largest direct lending strategy to date, while Allianz Global Investors held a $690m first close for its debut emerging markets credit strategy, focused on Africa, Asia, central and eastern Europe, Latin America and the Middle East. Meanwhile, Blackstone led a $1.2bn funding round for Indian AI infrastructure start-up Neysa and Fortress opened a $236m asset-backed credit line for Mexican consumer finance adviser Bravo.
Apollo is also planning to put at least $20bn in financing to work in Mexico as it seeks new outlets for its private credit business, according to market reports.
Rethinking risk
EM fund managers feel the perception of EM risk doesn’t line up with the reality. The confidence and comfort doesn’t come from a magic formula, but a combination of deep market knowledge, legal expertise in riskier jurisdictions, and credit structuring.
“Investors are less familiar with emerging private credit. We have to explain to them that it doesn’t necessarily mean you have more downside, and it doesn’t mean that you have less margin of safety. You just have to carefully select the countries you invest in,” said Lowy.
First, to achieve the same credit rating as a DM peer, an EM company needs better margins and less leverage, according to a rating agency analyst. “We mark the homework of EM companies more harshly than their DM equivalents for the same nominal risk. The reality is borrowers in emerging markets who achieve a given rating are structurally stronger than their developed markets counterparts at the same rating level,” the analyst added.
High-yield companies in DM typically run 4-6x versus roughly 3-5x in EM, according to data from GPCA and Ninety One.
It also helps to remind investors that “volatility is just a fact of life in emerging markets,” so local managers and borrowers have had to “price it in and structure around it for decades” compared to lenders who have focused only on developed markets, said Jeff Schlapinski, managing director at GPCA.
Second, relatively less competition among fund managers means EM lenders have the upper hand when it comes to underwriting simpler capital structures and setting loan terms, as opposed to cov-lite deals in DM, market participants said.
“We don’t do deals without airtight covenants including enforcement language because we need them to protect our investors. So the sponsors don’t have a choice — they either take those conditions, or they don’t have financing,” said a direct lender focused on the Middle East and Africa.
Standard risk discipline frameworks of “good governance, good cashflow generation, and robust monitoring and reporting requirements” still apply, as well as typical checks on “management experience, sponsor track record, credit history, and what kind of bank relationships they have,” the lender added.
Third, the nature of emerging economies means there will be more asset-heavy businesses such as manufacturing or industrials, according to Schlapinski. It’s a natural extension for asset-backed lenders, but even cashflow-oriented lenders like the ability to secure against hard assets when underwriting loans, especially in EM.
“We always take security. We always take [assets as] collateral. For cashflow generating businesses, the collateral is often real estate or infrastructure,” said Lowy.
It’s also prime time for lenders who operate in emerging markets and focus on hard-asset collateral to capitalise on the growing demand for data centre financing (although admittedly this has waned of late), coupled with the growing need for roads, water and power grids in developing economies.
“Saudi Arabia and the UAE have big growth ambitions led by infrastructure, whether those take the form of big oil or gas pipelines, water desalination projects or solar projects. The scale is huge, compared to even the infrastructure demand in markets like Turkey or Brazil,” said Kilic.
Lastly, EM private credit managers have no qualms about keeping default rates low and going into enforcement.
“We’ve enforced many, many times, probably tens of times over the last 20-25 years,” said Lowy. “The process depends on the jurisdiction. Some are super efficient and super predictable, like Korea, for example; in other markets where we operate, it can be a bit slower. But ultimately, it works because it gives you quite a bit of leverage to negotiate and it doesn’t necessarily force you to have to go after collateral. Having the threat to be able to get there is what you really need.”
To EM or not to EM?
Even as investors re-evaluate risk and new capital flows into emerging markets, EM-focused lenders aren’t worried about losing their edge.
“The capital being raised for Asia and the Middle East is growing, but not as fast as the pipeline and the amount of opportunities,” Lowy said. “So although there is more capital, we don’t need to accept lower returns or take more risk to deploy that additional capital.”
Experience and regional relationships with banks and sponsors also help EM credit funds generate alpha.
“You need to work with the credible local law firms, and you need to build those relationships over time,” Kilic said. “We also work with the top 20 international banks to originate deals. We say, ‘Show us everything you are seeing in India, the Philippines, Singapore, Vietnam, Brazil, Turkey, Kazakhstan, Uzbekistan, etc. This is our criteria, and we may be able to partner up with you and take some of those assets from you,’” he added.
Other direct lenders have not been able to get comfortable with the process of relying on banks for origination.
“We wouldn’t consider emerging market private credit — not now and maybe not ever,” said a fund manager at a UK direct lender. “It’s an origination decision. We have relationships with sponsors and assets, most of which I can walk to from the City. There is no version of this where I sit in EC2 and originate a good loan in Lagos. I don’t have the local knowledge and would end up getting stuck buying whatever the local bank didn’t want.”
Fund managers are also keenly aware that investor education will be an uphill battle. Besides the perception of higher risk versus DM, LPs also cite a lack of in-house expertise and limited knowledge of how to find managers, conduct due diligence and benchmark performance in EM private credit, said a senior executive from a private markets consultancy.
But others say the framework of dividing economies into DM and EM is actually what needs rethinking, rather than the risks. “I don’t think there’s such a thing as emerging markets. You know that the term came out of the equity index world in the early 80s, and it has never really mapped onto credit? For me, it comes down to two things: is there an opportunity, and is it worth the risk?” said a UK partner at a credit firm.
Ninety One’s Alan Siow, co-head of emerging market corporate debt, agrees that the line between EM and DM is “arbitrary”, especially as geopolitical conflicts such as the Iran war bring economies closer together.
The bottleneck
But if there’s $4.3trn of opportunity in emerging markets, what’s stopping investors and lenders from diving in? 61% of investors named the perception of higher risk in emerging markets as the main blocker to investing in emerging market private credit, according to the Gemcorp private credit survey.
Perceived risks of “corruption”, “legal protection”, “defaults” and “manager ability to mitigate legal risk” are the most common hurdles to overcome, said Schlapinski. EM-focused GPs agree that these are the topics that come up over and over when speaking to LPs.
In fact, LPs historically found it easier to put more capital to work in developed markets via second-lien exposure rather than take on first-lien exposure in EM, said Siow. It’s the reason why many institutional investors, who are risk-averse by nature, typically build private credit portfolios with senior direct lending strategies concentrated in the US and western Europe — regions with ‘developed’ economies featuring deeper capital markets, institutional banking systems, strong rule of law and political stability.
Which is why “concentration risk” might be a “bit of an understatement,” according to the pan-European LP. Of the estimated $3.5trn global credit market, the US and Europe dominated 93% of global private credit AUM — a percentage that maps almost exactly onto how LP private credit portfolios are geographically split, as seen in the Gemcorp study. On average, the investors allocated 56% of their private credit portfolios to North America, 27% to western Europe and 11% to developed Asia.
But “deliberate reallocation” toward “under-represented geographies” is an effective, forward-looking portfolio management exercise LPs can begin doing now to hedge against “inevitable losses” in more mature credit markets, the pan-European LP said.
In the meantime, there are ways investors can “dip a toe in” while they’re still getting comfortable with emerging market risk, said a UK-based debt advisor.
“Sometimes investors want to know if they can widen their jurisdiction provisions in an existing vehicle to allow an [EM] sleeve, or if we can do something alongside a DFI. That’s become much more common this year, partly because the DFIs have rotated back into debt after a few years of doing equity,” the advisor added.
Strong momentum in the DMs
But it’s hardly all quiet on the western front for US and European direct lending. Earlier this week, Tikehau closed its sixth European direct lending fund at €5.2bn, an increase of 60% compared to its predecessor fund. The strategy focuses on sponsor-backed lending in the European core mid-market.
Private credit managers have raised $190bn in H1 26, up from $124bn in H1 25, according to data from With Intelligence by S&P Global. Barings held the final close of its global direct lending strategy at $19bn in May, while Adams Street Partners pulled in $7.5bn for its third private credit fund focused on US and European sponsor-backed lending.
European private credit pipeline
More money, more M&A, as the saying goes.
In France, Capza is providing a unitranche facility to support Motion Equity Partners’ carve-out of French cosmetics business Capsum from parent company Chanel.
In Austria, traffic technology provider Swarco is considering a carve-out of transport hardware and software business Intelligent Transport Systems (ITS). Buyers could be looking at leverage between 4.5x and 5x the firm’s €100m EBITDA to finance the carve-out.
And in another turn of events, Bridgepoint’s credit arm is in talks with Carlyle to take the keys to sustainability consultancy Anthesis. Talks between the firms are ongoing, and no final decision has been made.
You can read our weekly updated pipeline of new and in-market deals here.
